The Exhaustive Consequences of Kirtsaeng

JURIST Guest Columnist John Rothchild of Wayne State University Law School says the Supreme Court's decision in Kirtsaeng could impact the scope of the patent exhaustion doctrine as well as seller-imposed limitations on ownership of purchased copyrighted items....

The Supreme Court's recent decision in Kirtsaeng v. John Wiley & Sons, Inc. definitively settled an important issue that had been haunting copyright law for decades  whether a copyright holder has the legal right to prevent the owner of an article embodying a copyrighted work from importing that article into the US if it was manufactured outside of the US.

Under the first-sale rule, codified at 17 USC §109(a), once a copyright owner disposes of a copy she loses the right to control the further public distribution, including resale, of that copy. In Kirtsaeng, the copyright holder, publisher John Wiley & Sons, argued that its textbooks manufactured abroad were outside the scope of the first-sale rule, on the ground that the rule applies only to items that are "lawfully made under this title" (i.e. Title 17, the title of the US Code containing the Copyright Act). Wiley argued that the quoted phrase should be interpreted to mean "lawfully made within the United States." But the Court flatly rejected that proposition: "We hold that the 'first sale' doctrine applies to copies of a copyrighted work lawfully made abroad." As a result, a person who purchases a book or other copyrighted item that is made with the copyright owner's authorization is free to import it into the US or resell it there, regardless of whether it was manufactured domestically or abroad.

So much is clear. What is not obvious on the face of the opinion is its potential impact on two more-or-less remote issues of law: the scope of exhaustion of patent rights, and the authority of a copyright owner to determine through a form of words when a person who has purchased a copyrighted item will be deemed the "owner" of that item for purposes of the first-sale rule.

Patent Exhaustion

Patent law has its own version of the first-sale rule, usually referred to as "exhaustion." That judge-made doctrine states that once an article embodying a patented invention has been sold with the permission of the patent owner, the patent owner loses the statutory right to control use or subsequent resale of the article. In Jazz Photo Corp. v. International Trade Commission, the US Court of Appeals for the Federal Circuit held that patent exhaustion does not result from the sale of an article that occurs outside the US. In a subsequent decision it explained the basis for this holding: a foreign sale "can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect."

The Court's decision in Kirtsaeng thoroughly undermines the rationale for this limitation of the patent exhaustion doctrine. Wiley argued that the first-sale rule's limitation to copies "lawfully made under this title" must exclude copies made outside the US because the Copyright Act does not apply extraterritorially. This rationale had been accepted in several lower-court decisions that found no copyright exhaustion from sales occurring outside the US. Justice Ruth Bader Ginsburg's dissent in Kirtsaeng (joined by Justices Anthony Kennedy and Antonin Scalia) likewise relied on the extraterritoriality rationale: "The Copyright Act, it has been observed time and again, does not apply extraterritorially[.] The textbooks thus were not 'lawfully made under [Title 17],' the crucial precondition for application of §109(a)." But the Court rejected the notion that predicating copyright exhaustion on a sale that occurs outside the US constitutes an extraterritorial application of the Copyright Act. It quoted with approval the Nimmer treatise's observation: "the principle that 'copyright laws do not have any extraterritorial operation' 'requires some qualification[.]'" Nimmer goes on to illustrate one such "qualification": "[A] distinction should be drawn between purely extraterritorial conduct, which is itself nonactionable, and conduct that crosses borders, so that at least a part of the offense takes place within the United States[.] U.S. courts may entertain such multiterritorial infringement claims."

Thus, the Court in Kirtsaeng adopted a narrower view of what constitutes "extraterritorial" application of a US law than did the lower courts that found no exhaustion of copyright rights resulting from sale of a foreign-made article. Specifically, the Court rejected the notion that a court may not take account of conduct occurring outside the US in assessing whether conduct occurring in the US violates a US law. Applied in the context of patent exhaustion, this holding contradicts the Federal Circuit's view that it would be a forbidden extraterritorial application of the Patent Act to find that a US patent is exhausted by a sale of the patented article outside the US. If it is not an extraterritorial application of law to hold that a copyright is exhausted from first sale of a copyrighted article manufactured abroad, neither is it an extraterritorial application to hold that a patent is exhausted when a patented article is sold abroad. And if international exhaustion is not an extraterritorial application of the patent law, then the rationale for refusing to find exhaustion from a sale abroad falls away.

Controlling Application of the First-Sale Rule Through Use Restrictions

The Court's decision in Kirtsaeng may also have an impact on another fiercely debated issue relating to copyright's first-sale rule. Under §109(a), only "the owner of a particular copy" (emphasis added) is entitled to the benefits of the first-sale; one who merely (albeit lawfully) possesses a copy, such as through a lease or bailment, remains fully subject to the copyright owner's right to control public distribution of the copy. In Vernor v. Autodesk, Inc., the US Court of Appeals for the Ninth Circuit adopted the view that a copyright owner can prevent one who purchases a copy of copyrighted software from being deemed the "owner" of that copy for purposes of the first-sale rule by reciting limitations on the purchaser's right to use that copy: "We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions."

In Kirtsaeng, the publisher tried just this maneuver in an effort to prevent application of the first-sale rule to textbooks that it sold outside the US. The books displayed a legend stating:

This book is authorized for sale in Europe, Asia, Africa, and the Middle East only and may be not exported out of these territories. Exportation from or importation of this book to another region without the Publisher's authorization is illegal and is a violation of the Publisher's rights.

This restriction would seem to meet Vernor's second and third criteria, and the addition of a statement that "This book is licensed not sold" would not seem to add any meaningful additional restriction. Yet the Court did not find that this use restriction prevented the book purchaser from becoming an "owner" of the copy for purposes of the first-sale rule.

It is true that the issue of whether the textbook purchaser was "owner" of the books was not an issue in the case, and therefore the decision's impact on Vernor and similar cases is only suggestive. Nevertheless, the Kirtsaeng decision provides an additional avenue of argument for rejecting the view that a copyright owner can prevent operation of the first-sale rule, thereby obtaining perpetual control over resale of copies that by all commonsense standards it has sold, merely by reciting restrictions on the use of the copy.

John Rothchild, Associate Dean and Associate Professor of Law at Wayne State University Law School, teaches several courses, including international intellectual property law. He is an author of the casebook Internet Commerce: The Emerging Legal Framework.

About Academic Commentary

Academic Commentary is JURIST's platform for legal academics, offering perspectives by law professors on national and international legal developments.
JURIST Forum welcomes submissions (about 1000 words in length - no footnotes, please), inquiries and comments at academiccommentary@jurist.org